Some, Uh, Interesting Words About Austerity

I was wholly prepared to link to a certain article, convinced that perhaps Keynsianism was the ticket to our troubles. A certain quote lead me to the story: “the Keynesian prescription works. [However] austerity converts downturns into recessions, recessions into depressions.“1 Boy was I hooked and ready for more. Seriously. I was curious about this; if it were true, then I would need to change my tune.

However, I followed the link, and read this:

The Keynesian policies in the aftermath of the Lehman brothers bankruptcy were a triumph of economic theory. In Europe, the US and Asia, the stimulus packages worked. Those countries that had the largest (relative to the size of their economy) and best‐designed packages did best. China, for instance, maintained growth at a rate in excess of 8%, despite a massive decline in exports. In the US the stimulus was both too small and poorly designed – 40% of it went on household tax cuts, which were known not to provide much bang for the buck – and yet unemployment was reduced from what it otherwise would have been – over 12% – to 10%. 1

This last bit in particular got me questioning this op‐ed. The salesmen behind the stimulus here in the U.S. were claiming it would hold unemployment below 8%, never that it would keep it around 10%, let alone mentioning a figure of 12%. China’s growth isn’t necessarily growth if you follow their economic story at all. Sure a lot of things are being produced, but it’s over production and over development (so much so that large cities have been planned and built, yet remain completely unoccupied).

This guy talks about aggregate demand as if the only thing keeping the economy down is a lack of demand for goods and services; and if we would only spend a little government money we would see that vaunted multiplier in action, thus increasing aggregate demand, production, and ultimately get people to work.

Doesn’t really work that way though. Yeah, demand is down, but having the government flood the market with dollars isn’t likely to produce the demand necessary to get out of the doldrums. I’ve read that what appears to be taking place, among many factors, is a reduction in debt–people are trying to get their balance sheets in order, leading to less demand as retiring household debt is the focus.

Don’t feed me this stimulus laden crap. It doesn’t work, and hasn’t helped increase demand at all. Bailing out banks may have helped prevent a giant financial disaster, but sending up a package of money that won’t even be spent for several years, not to mention only serves to pay several interest groups, is not a winning deal. What a farce.

But, hey, I’m a web designer. Not an economist.

  1. Stiglitz, Joseph. To choose austerity is to bet it all on the confidence fairy. Accessed 10/20/2010.